It’s official: Sydney’s house price boom has gone bust

The past twelve months has seen a massive turnaround in the Sydney property market.

A year ago Sydney was leading the nation for dwelling price growth, with values soaring an unprecedented 3.7% over the month of March 2021 – the strongest capital city house price growth in the nation.

Sydney’s quarterly dwelling value growth was also leading the nation, peaking shortly afterwards at 9.3% in May 2021.

Sydney’s housing fortunes have since taken a turn for the worse. The city’s dwelling values fell 0.1% in February and were down another 0.2% as at 28 March:

Sydney dwelling values

From boom to bust?

Now real estate experts claim Sydney’s house price boom is “100% over”.

Auctioneer and real estate industry coach, Tim Panos, claims demand has evaporated with auctions passing in without opening bids – a situation that will only worsen when interest rates rise:

“The boom is 100 per cent over. In February, we went from nuts to normal”.

“Now, if you ask me, as we move from March into Easter, we’re going from normal to value declines”.

“In September, there was the fear of missing out, but now for buyers, it’s been replaced by fear of overpaying”.

“It’s really clear that the party is over.”

REA head of economic research, Cameron Kusher, also expects to “see more declines in more suburbs, especially if interest rates do rise”.

Because Sydney is Australia’s most expensive housing market, it is also the most sensitive to interest rate rises.

For example, if interest rates were to rise by 2.65% by mid-2023 – as predicted by the markets – then median mortgage repayments would rise by 36% across Australia.

Assuming an 80% loan-to-value ratio principal and interest mortgage on the median priced Sydney dwelling, this would equate to a $1,426 increase in monthly mortgage repayments, as shown below:

Median monthly mortgage repayments with interest rate increase

Sydney mortgage borrowers are most exposed to interest rate hikes.

By comparison, median monthly mortgage repayments would only rise by $930 a month nationally under the same interest rate scenario.

Sydney mortgage holders better hope that markets are wrong and interest rates do not rise anywhere near as much as 2.65%. If that happened, an orderly house price correction could easily turn into an outright crash.

Unconventional Economist
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    • Jonathan Rubenstein

      There are rumors that, in tonight’s budget, Frydenberg will make the first $1 Million of your mortgage payments tax deductable, copying the USA.

      • Without going into whether such a plan made any sort of sense at a national economic level, were this deductibility to apply to the entire payment (P&I) it would surely be a killer blow to Labor’s chances.

        The US system appears to be for interest only.

        • I imagine Labor would instantly match it – otherwise yeah you’d never be able to counteract the self interest of the populace given their indebtedness.

      • Now that would be one way to negate the impact of interest rate rises, house prices and banks stocks to the moon!

      • That would be a very expensive addition to the budget given owner occupier debt is around 1.3 trillion in Australia and with interest rates on the rise deductions would be heading to the moon!

      • That’s 32.5B in tax deductions (approx.) per annum. If it does happen, its one of the biggest bribes in Australia’s history

        • Then again Fuel Excise is 19 Billion a year, and they propose to halve it “temporarily”.
          They’d get more votes with deductible mortgage interest,
          it would even it up with Negative Gearers, as they are never removing NG.
          And probably a 20% house price boom before the election.
          Winnner !
          Only in Australia – A govt subsidy for non-electric vehicles.

          and they are cutting Beer prices, another winner.
          Why not make Beer Tax deductible, and then no-one would notice their problems anymore.

  1. boomengineeringMEMBER

    The floodplain housing area of the Northern Rivers are near half price of the upper areas. Opposite is true of North Manly on and near Queenscliff lagoon, which flooded again last night. I wonder if people will reconsider paying premium there in near future.
    How many other areas in Sydney are in (need of) the same boat.

    • Fishing72MEMBER

      As a stand alone issue, independent of general market movement, the effects of natural disasters don’t appear to have much effect on house prices at all. It’s not that people’s memories are short, it’s more the fact that past catastrophes become abstract to people who are new to an area. No amount of bush fire footage from recent years has prevented the houses surrounded by trees increasing in price exponentially. Nor has any previous flooding of a zone impacted on house prices only a few years down the track. Most people either can’t grasp the reality of an historical threat or they numb it with optimism or greed.

      Example: A mate of mine has a property on South Coast NSW. The 2019 bushfires nearly took the house and would surely have done so had the owner not defended it at threat to his life. His family were traumatised to the point of depression and chronic ill health after the stress of the event. Their place featured on news reports and was held as an example of the dangers found living in the bush. Australians collectively shook their heads at the tragedy and learned a great lesson about the ever present threat to existence posed by natural disaster in the area. It was assumed that the area would never recover.

      Two years later and the same family gets regular unsolicited offers for the same property at prices multiples greater than just before it was hit by giant sheets of flame.

      If you were not afraid of assuming the role of human vulture you could do much worse than offering low ball offers for places recently smashed by flood. Those same “unsellable” properties will be Domain highlights in another few years when the mud is gone and the only reminder is tide lines around the tops of the power poles and even they will be nothing more than a curios talking point to newcomers. Not my deal to profit from the misfortunes of others but there is opportunities there for others. I’m sure many people who’ve just had their lives and homes inundated by filthy floodwaters would be grateful for a cash offer.

      I lost everything I owned at the time to cyclone Vance at Exmouth in 1999 and a few years later the waterfront canal blocks which had seen fishing boats washed and blown onto them were going for premium sums.

      • True dat.

        An ex girlfriend of mine has lived in the hills outside Lismore for 30 years. Last year her sister retired and moved to Lismore, buying a house on the floodplain. I could’ve said that’s a bad move, because my family is from the area and I know about floods, but nobody would’ve listened. Lismore floods if there’s a heavy dew in the morning FFS.

        To the surprise of sister but not me, her nice new cottage was flooded a few weeks go, and she’s now staying with the ex and utterly shocked. By some miracle, her insurance has agreed to pay out, so it’s not all bad news.

        Your point remains though….in a few years all the buyers will have forgotten the floods and realestate in the area will be transacting a usual.

      • Bushfire risk is more easily addressable than flood risk. Short of raising your existing house up on stilts (how high should you go to be “sure”?) there isn’t much one can do in the way of rectifying flood risk for an existing property.

        Bushfire risk is a different story. Having an large space around your house kept clear from things that could burn (trees, shrubbery etc) such that only short grass grew in that area; having your gutters clear of leaves; having your house sealed adequately against ember attack (windows/vents/door frames/etc.). There are many other options, especially if you want to have a sprinkler system and/or plan to stay and defend.

        I would buy an established property in a BAL “flame zone” without much hesitation as I know how to prepare. I may or may not build as “flame zone” could add north of 100k to the cost.

        I would not buy a property subject to the 1% chance of flood every year (the ‘1 in 100 years’ flood). In fact I pulled out of just such a property in Windsor NSW back at the end of October 2020 – 3 months before the first of the recent major floods – after receiving a $14k flood insurance quote.

      • To me, it really shouldn’t matter where people want to live or how suitable that building is for the area. The key however is not bailing folks out should it all go up in flames or floods. Insurers know the risks and if the place is uninsurable and you want to pay a premium for a property such as that, all power to you. Its your money to blow as you see fit.

        If left to its own devices the market would eventually work it out. Instead we get additional taxes/levies to help those who were not or underinsured to account for peoples poor decisions.

        For full disclosure, my previous regional property (South of Bega) was burnt during the 2020 fires, lost fences, trees and grass cover. House was fine because of where and how it was built.

    • kannigetMEMBER

      I would buy there, basically the floods we have just seen there have been once in a 1000 – 5000 year event so on average it will be good for another 10000 years or more… you can take that to the bank…. /S

  2. I predict that Sydney prices from 2022 to 2026 will look the same as from 2017 to 2021: First they drop 15%, then they increase 27%, ending up 12% higher than they were at the beginning; an average of 3% growth per year in nominal terms, or between 1% and 2% in real terms. The media have a way of taking something very mundane and making it sound dramatic.

    • Someone ElseMEMBER

      Being pedantic, but the percentages can’t just be simply added and subtracted.

      The percentage drop is always smaller than the percentage increase required to get back to the original number. E.g. a 10% fall takes an ~11% increase to get back, a 30% fall takes ~43% recovery, and a 50% fall takes a 100% increase to recover.

      So your numbers return an ~8% growth.

  3. Hill Billy 55MEMBER

    How many of the recent Queensland buyers still have property in Sydney/Melbourne and were relying on the continued upwards movements of prices there to fund their dream move? When will this correction force sales from this cohort? And which one will they sell?

    • Second properties?? I can’t get a straight answer anywhere on this, despite the supposedly ‘rich’ data available in Australia and the plethora of great economists.

      Did 25%+pa growth with closed borders, stagnant population growth, 400,000 new builds and a supposed economic crisis not sound odd to anyone else?

      Was everyone buying second properties or was there that much pent up demand from multiple families previously living under the same roof?

      • I am with you Jimbo,
        It dosnt make sense to me either. Why didnt rental vacancy rates rise, and rents fall? If you buy a second home 9 times out of 10 its rented. If you buy a home and stop renting, then that property becomes vacant.
        The numbers dont add up.

        • strange EconomicsMEMBER

          They don’t rent them out if the rent is too low.
          Bad for the market prices.
          Anyway just AirBNB beach towns.

      • Second properties which are not lived in 90% of the year. You dont need to rent it if its value is growing 20% a year with zero tenancy.

      • kannigetMEMBER

        A Mate recently sold his foster acreage to a northern beaches couple who intend to build a dream home an move there permanently within the year. They apparently had a number of investment properties in Sydney they were intending to use to fund this move.
        I have heard similar stories from people all the way up the coast. Its resulted in massive price expectation growth that is about to come tumbling down when rates bite. Sales in the area I grew up in have already stagnated again.

        All this doesnt go anywhere to explain the insane rises in Sydney but it does in regional areas. Tree changers, Sea changers and Self Quaranteeners all bailing. I expect we will see a glut of metro property soon when they realise the nest egg they are expecting to live off is about to contract and they need to secure the new “paradise” they just bought into.

  4. Price is very interesting, but not as interesting as performance.

    Take the example of sport, football or motor racing. It is quite interesting to know how much the people are paid, and how much a set of tires costs, and what the prize money is. However most viewers are more interested in the performance of the cars and the performance of the players and drivers.

    What about the performance of Sydney houses?
    Go to an area with recently built houses and compare it to an area that was built decades ago. Which is better? Not in price, but performance.

    I suggest that our new houses are worse than they used to be. Smaller yards, further from a train station. Longer drive to work. Built in hotter areas, more flood-prone, less greenery, etc.

    What a disgraceful situation.

    • Good perspective. BASIX ratings are a joke because there is no testing. Its all theoretical desktop reports. Aspect, airtightness, insulation and materials (thermal mass etc) need to be accounted for based on climate. Australia does a terrible job on all these fronts. Only motivated individuals who want a comfortable place actually care about such things.

  5. One of my reports with a salary north of 250K a year is taking a second job so that they can afford a house in Sydney. How did we get here?

    • It’s still poor that anyone needs a second job for a house in a capital city, but if the partner isn’t working, they’re worse off than a couple on 125k each coz of the tax split. And a couple on 125k each seems a lot more normal than one person earning 250k seeking a second job.

  6. RAY DALIO There’s cyclical inflation and there’s monetary inflation. And I think that people are not looking, and the Fed is not adequately looking, at the fact that when there’s a lot of debt, and you create a lot of debt and money, which of course, is a great stimulant. Also, one man’s debts are another man’s financial assets. And so, what we’ve seen is that throughout history, we can go back literally thousands of years, as the debts rise and there’s somebody’s financial assets, there’s a balancing act that becomes increasingly difficult.

    And so, when we look at what’s ahead, we do know how these cycles work. We know that you have a recession to a recession, and on average they’ve been about seven years, and they’re shorter when you start quicker. And so, we’re in a cycle where there was a lot of money and credit. I mean, from the investor’s point of view, think about how bad that debt is. I’m holding cash. Last year, I lost seven percent to cash. One would have lost seven percent in buying power. And now if you have a five percent inflation and so on, the things are changing. And so, because they’re changing in that way, inflation psychology is going to change. They don’t want to hold the bonds or they don’t want to hold the cash, much less. And so we have an extra risk that they may sell those bonds and that cash, and when they do, then that creates a bigger deficit in funding, because not only do you have to sell the Treasury, what the Treasury has to sell, there has to be enough buying to buy what the sellers are selling. And when that comes up, it puts the central bank in the position of either having interest rates rise a lot, and that shuts things off, or having to come in and fill the gap in a bigger way than it was done before. So as that psychology changes and wages change and all of that, we are on the brink of that happening. So yes, we have a big issue pertaining to inflation.

    The trade-off, it appears to me, that a high enough interest rate to adequately contain inflation, of what we might think is adequate, is too high of an interest rate for the markets and the economy. So the trade-off that the Fed is going to face will be an even greater, more difficult trade-off between inflation and growth. Think about it, the tightening that might be priced into the market might take it to two percent, maybe, give or take a bit. Two percent interest rate, when you have something that could be a five percent inflation rate and you have the supply-demand imbalance, is something that is really a problem.

    DALIO Almost any prospect is, you’re going to have a much higher level of inflation than you will have an interest rate. And when that happens, you’re going to have continued losses in buying power, and that’s not going to be palatable.

    DALIO I think that the Fed’s forecast, that it was transitory, was obviously wrong — okay — I think they are misunderstanding things. I think they put too much on the cycle, a normal cycle. Why are real interest rates — since we started, when we started setting inflation index bonds, they were four percent real. How did they get to minus one percent? Why is the equilibrium in interest rates 500 percent, 500 basis points, lower than it was back then? There is something bigger going on. And that bigger thing that’s going on is the accumulation of debt, because that’s buying power. That’s stored buying power. So everybody’s got to believe that that stored buying power is real. Yet if you think about: How are you going to get that? Can everybody sell those bonds and actually convert that into purchases? No way. So if you look at history, throughout history, there is this bigger thing that’s going on, this bigger debt cycle thing that’s going on. And so, I think there’s not enough attention paid to that.